Euro, dollar-yen hit February highs

SaumyaVaishampayan

NEW YORK (MarketWatch) -- The dollar on Thursday rose to its highest level against the yen in February, while the euro strengthened after the region’s top central banker dismissed the threat of deflation in the euro zone, prompting questions about future easing actions.

Investors looked ahead to Friday’s January jobs report for a better read on the labor market’s recovery and prospects for economic growth.

Reuters

The European Central Bank’s Mario Draghi doesn’t seem too concerned about the risk of deflation.

The European Central Bank made no change to its main lending rate, leaving it at 0.25% as expected. European Central Bank President Mario Draghi emphasized that euro-zone price declines don’t resemble those seen in Japan before its long deflationary period, adding that inflation expectations remain well-anchored. He said the central bank is ready to take action if needed and directed attention to staff economist projections for 2016 due at the next ECB meeting . Read a recap of Draghi’s press conference here.

“He was surprising pretty balanced and neutral,” said Stephen Gallo, European head of foreign-exchange strategy at BMO Capital. “He seemed to suggest that the Governing Council is in a position now where it doesn’t think evidence of deflation is convincing enough to warrant action.

The euro, which had dropped to its lowest level of the day after the ECB decision, reversed losses during Draghi’s opening statement. The euro
EURUSD, +0.0000%
rose to 1.3588 from $1.3536 late Wednesday. That’s the highest level since Jan. 29, according to FactSet data.

Stepping back, the euro has been stuck in a range against the dollar because of two opposing factors, said Sara Yates, head of foreign-exchange strategy at J.P. Morgan Private Bank. On one hand, rising U.S. yields as a result of a reduction in monetary stimulus will boost the dollar. But at the same time, the recovery in the euro zone is starting to attract investors across assets, including European equities and fixed income. “That’s an inflow argument,” she said, which will push the euro higher.

The firm has a one-year forecast of $1.33, said Yates. What could change this dynamic is action from the ECB. Of the options, another cut in the refi rate is most likely, said Yates.

The dollar
USDJPY, +0.00%
rose to ¥102.10 from ¥101.45 late Wednesday, hitting its highest level since Jan. 30.

AFP/Getty Images

An employee counts USD notes at a money change outlet.

As monetary-policy remains on hold across the pond, the Federal Reserve has embarked upon a path to remove its monetary stimulus. The Fed reduced its monthly bond purchases by $10 billion in January to $65 billion, which followed its initial cut in December. Continued reductions are dependant on economic data, which has made some investors nervous in light of recent disappointing reports for ISM manufacturing and December jobs. That has built up anticipation for Friday’s jobs report.

ICE dollar index
DXY, -0.30%
which tracks the U.S. unit against six other currencies, fell to 80.901 from 81.054 late Wednesday. The ICE dollar index is heavily weighted toward the euro. The WSJ Dollar Index
BUXX, +0.00%
, a measure of the dollar’s strength against a broader basket of currencies, edged down to 74.03 from 74.08.

“With companies in the service sector adding jobs at a faster pace, a rebound in non-farm payrolls is a certainty,” said Kathy Lien, Managing Director for New York-based BK Asset Management, in a recent note.

However, markets remain uncertain about the magnitude of the increase in jobs.

According to another report from U.S. private payroll provider ADP, the U.S. private sector only added 175,000 jobs in January, the smallest increase since August. Given the slowdown, non-farm payrolls growth might fall short of the market’s forecast of 182,000, Lien said. “Investors are worried that the U.S. recovery is losing momentum with the problems exacerbated by the Federal Reserve’s taper policy.”

Earlier, the Bank of England also left its monetary policy unchanged, with its key lending rate at 0.5%. The bank is scheduled to release its quarterly inflation report on Feb. 12, which could offer insight into the future path of U.K. interest rates. The British pound
GBPUSD, +0.0000%
rose to $1.6323 from $1.6309.

The Australian dollar
AUDUSD, +0.0000%
headed higher to 89.62 U.S. cents from 89.11 U.S. cents in the prior session.

The dollar declined against the Mexican peso,Turkish lira and South African rand.

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